Can politics and central banks derail the ongoing recovery?

Key points

A surprisingly benign summer despite Brexit and ongoing modest recovery should not leave room for complacency.

Central banks remain at the centre of market focus but expectations may be too high: while the Fed signals modest tightening, and the BoJ a stabilisation of accommodation, we expect only a modest ECB move in December. Markets may soon question central banks “new normal”.

Political risks will slowly take the front stage, primarily with the US Presidential Elections coming into focus. While some risk-off reaction is possible, markets may see a Trump election as lifting short-term economic activity and boosting corporate profitability which could support the dollar. Italy’s referendum will follow suit but too late for the bank topic to come back in 2016.

In this context, we remain underweight in equities and neutral in rates. We keep faith in credit, supported by a global search for yield and strong technicals in Europe. We have concerns about bouts of volatility ahead.

Over the summer we published research covering the upcoming Presidential Elections on 8 November. We considered the states of the polls, the candidates and their proposals and looked at different post-election scenarios considering their economic and financial market impacts2. Since then we have seen several developments...